Article

Factual Summary: Seller contracted with Buyer for the sale of salmon. When Buyer encountered financial difficulties, Seller agreed to advance payment to finance Buyer's operations. To secure repayment of these advances, Bank (Issuer) issued a standby LC on behalf of Buyer/Applicant in favor of Seller/Beneficiary.

The LC provided that the Issuer would pay the Seller/Beneficiary on presentation of Seller/Beneficiary's written demand for payment accompanied by a signed statement stating the requested amount, certified copies of the remittance confirmations of the advances made by Beneficiary (each to include the LC number and installment number of the advance), and the original LC. Furthermore, the LC contained a payment schedule for the advances to be made to Buyer/Applicant by Seller/Beneficiary.

Seller/Beneficiary made three advances to Buyer/ Applicant before the LC was issued, the first of which occurring on the date specified by the LC. The second and third advances were late according to the LC schedule. After the LC was issued, Seller/Beneficiary and Buyer/Applicant amended their supply agreement to reflect their financing arrangement and made the agreement retroactively effective beginning the day of the first advance by Seller/Beneficiary. The fifth advance made by Seller/Beneficiary was late.

After three repayments, Buyer/Applicant defaulted. Seller/Beneficiary then demanded that Issuer pay USD 1,500,000 under the LC, the full amount then available for drawing (the LC amount had decreased in accordance with the repayment schedule). Seller/Beneficiary included copies of the six remittance confirmations corresponding to the advances made to Buyer/Applicant and a copy of the LC. Issuer refused Seller/Beneficiary's demands on 10 July 2013, which was received on 11 July 2013, claiming that "some of the remittance confirmations did not reference the installment number of the corresponding advance of the letter of credit number," the advances were made late, and the Seller/Beneficiary had supplied a duplicate, not original, LC.

Seller/Beneficiary responded that the discrepancies were immaterial, that the advance schedule could not have been complied with because the LC was issued after the advances began, and that the original LC was never issued, only an electronic copy. Two days after rejecting the demand, Issuer assured Seller/Beneficiary that it would remit the USD 1,500,000 after Buyer/Applicant waived the discrepancies, agreeing to instruct Buyer/Applicant to do so. Buyer/Applicant also assured Seller/ Beneficiary that it would sign the waiver. Seller/ Beneficiary did not seek to rectify the discrepancies or make a further demand against the LC.

When Issuer gave its "official rejection" of the demand on 20 August 20 2013, Seller/Beneficiary re-presented its demand, but by that time the amount available had decreased to USD 150,000. Seller/ Beneficiary then sued Issuer for breach of letter of credit and fraud in the inducement. The Judge granted Issuer's motion to dismiss the claim for breach of letter of credit for lack of personal jurisdiction, but denied its motion to dismiss the claim for fraud in the inducement for failure to state a cause of action.

Legal Analysis:

Breach of LC; Personal Jurisdiction: Issuer argued that the court lacked personal jurisdiction. The Judge found that Seller/Beneficiary had not established specific jurisdiction, relying on contract law from other circuits. In its ruling, it stated that in order for a court to hear a case against an Issuer in Seller/Beneficiary's forum, Seller/Beneficiary and Issuer must have a relationship beyond those contacts that would be expected between a LC beneficiary and issuer. Issuer must have demonstrated a purpose to avail itself of the privilege of conducting business in the beneficiary's forum, which the judge did not find in the transactions between Seller/Beneficiary and Issuer. Ruling that negotiations between the Seller/ Beneficiary and Issuer that took place as a result of Issuer's duty to Buyer/Applicant were insufficient to establish that an Issuer could be haled to court in Seller/Beneficiary's jurisdiction, the Judge dismissed Seller/Beneficiary's claim for lack of personal jurisdiction.

Fraudulent Inducement and Fraud Claims: The Judge applied a different standard for intentional tort liability with respect to personal jurisdiction, finding that the Issuer had purposefully availed itself of the forum state's specific jurisdiction by fraudulently inducing Seller/Beneficiary with an LC that Issuer knew Seller/Beneficiary would not be able to comply with, knowing that the harm would be incurred by Seller/Beneficiary in their locale. Furthermore, the Judge ruled that the violations of the state's unfair or deceptive business practice allegations may proceed; allowing Seller/Beneficiary's claims that Issuer fraudulently misrepresented that it would assure payment on the LC with respect to Buyer/Applicant's waiver. Since the court has personal jurisdiction to hear those claims, the Judge denied Issuer's motion to dismiss for failure to state a claim.

Comments:

The action for fraud in the inducement raises significant issues. The alleged fraud does not satisfy the tests of UCC §5-109 (Fraud and Forgery) but falls under a state statute regarding unfair trade practices. If it is established that the issuer misrepresented that it would obtain the waiver of the alleged discrepancies, the question arises whether it is actionable as an alternative to UCC Article 5.

The requirement of presentation of the original standby highlights the reason a beneficiary should insist that such a requirement be debated.

The opinion is confusing regarding the notice of refusal, which apparently was sent on 10 July and received by the Beneficiary on 11 July but "officially" given on 20 August. This delay should have resulted in the preclusion of the issue under ISP98 Rule 5.03 (Failure to Give Timely Notice of Dishonour) or, at the least, raises questions requiring an explanation regarding what is meant by "officially".

It appears that the supposed discrepancies regarding the payment of advances were nondocumentary conditions that could not be a basis for refusal. It would be interesting to know how the provisions for decrease of the amount were handled and whether they were also non-documentary.

[ALC/jbb]

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